Bills Digest no. 48 2008–09

WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.

The purpose of the National Rental Affordability Scheme
(Consequential Amendments) Bill 2008 (the Bill) is to amend the
Income Tax Assessment Act 1997 (the ITAA) to give effect
to tax incentives for the purposes of the National Rental
Affordability Scheme (the NRAS) established by the National Rental
Affordability Scheme Bill 2008.

Note that the Bill would operate retrospectively and would apply
to income tax assessments for the 2008-09 and subsequent financial
years.[1]

The NRAS seeks to assist low and moderate income households in
rental accommodation, by subsidising both

investment in additional rental properties, and

the rents on those rental properties.

The rent subsidy would take the form of rent at a rate of at
least 20 per cent below the market rate.[2]

NRAS investment subsidy would take the form of three types of
tax incentives to investors in the NRAS:

exemption of capital gains from tax

tax offset, and

making a State or Territory contribution to the scheme in cash
or in-kind non-assessable for tax purposes.

A tax offset applies where the investor is liable to pay tax.
The Commonwealth would offer institutional investors and other
eligible bodies an annual tax offset for 10 years,[3] provided the investors comply with
the NRAS s conditions.[4] The conditions generally include that:

the renter meets an as-yet-unspecified income test, and

the rent is at least 20 per cent below the market rate (also
undefined).

The tax offset would initially be $6000 per dwelling per
year.

State or Territory governments would, also contribute an annual
amount in financial or in-kind support and initially, this
contribution would be $2000 per dwelling per year.[5]

Both the Commonwealth and State incentives would be indexed to
the rental component of the consumer price index.

According to the Government, the total fiscal cost of the NRAS
(in other words, the cost of the NRAS to the Budget) would be
approximately $622.6 million over a period of four years as
follows:[7]

2007-08

2008-09

2009-2010

2010-2011

2011-12

$23.5m

$72.2m

$170.1m

$356.8m

The Government also states that compliance costs for entities
participating in the NRAS may vary depending on the type of entity
and that these costs are likely to be low.[8] However, an estimate of these costs
would be necessary to inform prospective NRAS participants, who
would weigh such costs against any proposed incentives when
deciding whether to participate in the NRAS.

Item 1 inserts the definition of the
National Rental Affordability Scheme into existing
section 11-55 of the ITAA.

Item 6 of the Bill proposes amendments to the
ITAA in relation to capital gains tax
exemptions.

Item 7 of the Bill proposes to insert a
new Division 380 National Rental Affordability
Scheme into the ITAA, which deals with tax offsets
(new Subdivision 380-A), as well as the
non-assessability of State and Territory payments (new
Subdivision 380-B).

Taxation law provides capital gains tax concessions for housing
in two ways:

owner-occupied houses are exempt from capital gains tax; this
encourages the purchase of such housing relative to other forms of
investment, and

the rate of tax on capital gains on investments in rental
dwellings is concessional at 50 per cent of the gains.

With respect to capital gains tax and the NRAS, the Explanatory
Memorandum to the Bill states:

A capital gain or capital loss may arise from a
CGT event happening to an entitlement to receive incentives from
the Australian Government, or from state or territory governments,
in relation to the NRAS. The application of CGT to these
entitlements is inappropriate as it would reduce or remove the
benefit that the incentives are intended to provide.[9]

Item 6 proposes to amend subsection
118-37(1) of the ITAA, to include NRAS receipts in the
list of receipts that are exempted from capital gains tax. These
NRAS receipts are:

A tax offset reduces the amount of tax that a person or body
would have to pay in a financial year.

Item 5 proposes to insert a new
subsection 67-25(2B) into the ITAA, to the effect that tax
offsets under proposed new Division 380 would be
subject to refundable tax offset rules. This would make the NRAS
tax offset a refundable tax offset.

In item 7, proposed new subdivision
380-A would provide for six categories of bodies that
could claim a tax offset:

individuals, corporate tax entities and superannuation
funds

a party to a non-entity joint venture

certain entities to whom NRAS rent flows indirectly

claims by a trustee of a trust that does not have net income
for an income year

when the NRAS flows indirectly to or through an entity,
and

share of NRAS rent.

Not-for-profit entities do not ordinarily pay tax and so are not
eligible to receive incentives in the form of refundable tax
offsets. The Government states that not-for-profit entities may
instead receive incentives in the form of an amount payable for an
NRAS year.[12]

The provisions are largely mechanical and, as they are described
adequately in the Explanatory Memorandum,[13] this Digest does not describe those
provisions.

The provisions in proposed new subdivision
380-A are based on several principles, which may be
summarised as follows:

the claimant for a tax offset would have to possess a
certificate, issued by the Secretary of the department responsible
for administering the NRAS legislation, which would:

certify that the claimant is entitled to make an claim,
and

specify the amount of the offset

where there are multiple parties to a project for example, the
participants in an non-entity joint venture each party designated
in the certificate would be entitled to receive a pro-rata
proportion of the offset (the proportion that a party could claim
would be based on its share of the NRAS rent, and the total of the
proportional amounts would have to equal the total amount of the
offset), and

in general, the trustee of a trust indirectly entitled to NRAS
rent, could claim an offset only when the trust had net
income.

Item 7 also proposes to insert new
Subdivision 380-B Payments made in relation to the National Rental
Affordability Scheme etc., into the ITAA. New
Subdivision 380-B would contain new section
380-35, which proposes that a payment or non-cash
(in-kind) benefit provided by a State or Territory, would be
neither assessable nor exempt income.

Concluding comments

However, the effect of these incentives would be mitigated by
the fact that investors would have to accept below-market rents as
a condition of participating in the NRAS. Compliance costs would
also be a factor for consideration by investors.

Potential investors would have to weigh such factors when
deciding whether to invest under the NRAS.

[2]. Market rate or market value rent is not defined in
either the National Rental Affordability Scheme Bill 2008 or in the
National Rental Affordability Scheme (Consequential Amendments)
Bill 2008. The Government has left the formula for determining
market value rent to be prescribed in future regulations: see
Explanatory Memorandum, National Rental Affordability Scheme Bill
2008, p. 5.

[3]. Explanatory Memorandum, National Rental Affordability
Scheme (Consequential Amendments) Bill 2008, p. 5. Note that the
proposed definition of incentive period is a 10 year period that
starts on or after 1 July 2008 : National Rental Affordability
Scheme Bill 2008 proposed section 4.

[5]. The Hon. Tanya Plibersek, Minister for Housing and
Minister for the Status of Women, Second reading: National Rental
Affordability Scheme Bill 2008 , House of Representatives,
Debates, 24 September 2008, p. 7.

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